Thumbnail

Do Banks Satisfy the Modigliani-Miller Theorem?

Aboura, Sofiane; Lépinette, Emmanuel (2015), Do Banks Satisfy the Modigliani-Miller Theorem?, Economics Bulletin, 35, 2, p. 924-935

View/Open
Type
Article accepté pour publication ou publié
Date
2015
Journal name
Economics Bulletin
Volume
35
Number
2
Pages
924-935
Metadata
Show full item record
Author(s)
Aboura, Sofiane

Lépinette, Emmanuel
Abstract (EN)
The capital structure of banks has become the focus of an extended debate among policymakers, regulators and academics. The seminal Modigliani-Miller (1958) theorem is seen as supportive of regulators' drive to require higher equity capital to banks. This raises the question on to what extent does Modigliani-Miller theorem hold for banks. This article brings a new insight of the Modigliani-Miller theorem by considering the implicit government guarantee offered to banks. Our theorem shows that a bank does not satisfy the Modigliani-Miller theorem. The main result indicates that banks will favor leverage instead of equity.
Subjects / Keywords
Modigliani-Miller; Leverage; Banks; Regulation
JEL
G3 - Corporate Finance and Governance
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G28 - Government Policy and Regulation